Pound lower on expectation rates will hold

The firm expectation that the Bank of England will not announce any change in interest rates after its Monetary Policy Committee finishes meeting today helped take the pound sharply lower yesterday.

Alongside better-than-expected news about the German economy, it took the pound more than two pfennigs lower to DM2.85, the weakest for nearly three months.

"The rise in the pound was predicated on a strong divergence between the German and UK economies," said Paul Meggyesi of Deutsche Morgan Grenfell.

The most recent surveys on the UK economy have hinted at the start of a slowdown in booming consumer spending. In addition, figures this week showed inflation declining closer to the target of 2.5 per cent.

The Bank of England stated last month it thought rates had risen enough for the time being.

There has been nothing in the recent figures to alter the picture, bringing mortgage payers a welcome respite.

Analysts said yesterday that this did not mean a future increase in UK interest rates could be ruled out. Nor were they convinced that the pound would continue to fall.

"The markets could call the Bundesbank's bluff on German interest rates, and if they did not raise rates that would give the pound a new lease of life," said Gerard Lyons, chief economist at DKB.

Separately, the British Chambers of Commerce said yesterday its members wanted the UK to join the single European currency with a delay, but nevertheless as close as possible to the planned 2002 introduction of the Euro notes and coins.